The
Short Iron Condor another volatility strategy and is the opposite of a Long
Iron Condor, which is a rangebound strategy.

The
Short Iron Condor differs from the Short Iron Butterfly in that the middle strikes
are separated.

Short
iron condors are not particularly popular because they produce a net debit and
offer very small returns compared to straddles and strangles with only slightly
less risk.

The
Short Iron Condor involves putting together a Bear Put Spread and a higher
strike Bull Call Spread. The higher strike put has a lower strike than the
lower strike call to create the Short Condor shape. The resulting position is
profitable in the event of a big move by the stock. The problem is that the
reward is seriously capped and is typically dwarfed by the potential risk if
the stock fails to move.

Market
Opinion

Direction
neutral.

P/L

When
To Use

Use
this strategy when you anticipate increased volatility in a stock price, in
either direction, and want to make a capital gain.

Example

XXXX
is trading at $52.87 on May 14, 2011.

Sell
August 2011 45 strike put for $1.88.

Buy
August 2011 50 strike put for $3.73.

Buy
August 2011 55 strike call for $4.70.

Sell
August 2011 60 strike call for $3.02.

Net
debit: premiums bought minus premiums sold = $3.53.

Benefit

The
benefit is that for a small capital outlay you have the possibility of
profiting from a rangebound stock, with capped risk.

Risk
vs. Reward

The
risk is the net debit you paid. The reward is the difference between adjacent
strikes minus the net debit.

Net
Upside

Difference
in adjacent strikes minus net debit.

Net
Downside

Net
debit paid.

Break
Even Point

Break
even up: middle long call plus net debit.

Break
even down: middle long put strike minus net debit.

Effect
Of Volatility

Positive,
unless the stock moves outside of the outer strikes.

Effect
Of Time Decay

Negative,
because you have to wait for a big movement in the stock price.

Alternatives
Before Expiration

You
can unravel before expiration.

Alternatives
After Expiration

Close
out the trade by selling the options you bought and buying back the options you
sold.

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